Income Statements under Absorption Costing and Variable Costing

Joplin Industries Inc. manufactures and sells high-quality sporting goods equipment under its highly recognizable J-Sports logo. The company began operations on May 1 and operated at 100% of capacity (61,600 units) during the first month, creating an ending inventory of 5,600 units. During June, the company produced 56,000 garments during the month but sold 61,600 units at $115 per unit. The June manufacturing costs and selling and administrative expenses were as follows:

a. Prepare an income statement according to the absorption costing concept for June.

b. Prepare an income statement according to the variable costing concept for June.

c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

Under the   method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under  , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory decreases, the   income statement will have a lower income from operations.

The Production Department of Hruska Corporation has submitted the following forecast of units to be produced by quarter for the upcoming fiscal year:

Each unit requires 0.25 direct labor-hours and direct laborers are paid $13.00 per hour.

In addition, the variable manufacturing overhead rate is $1.80 per direct labor-hour. The fixed manufacturing overhead is $87,000 per quarter. The only noncash element of manufacturing overhead is depreciation, which is $27,000 per quarter.

Required:

1. Calculate the company’s total estimated direct labor cost for each quarter of the upcoming fiscal year and for the year as a whole.

2&3. Calculate the company’s total estimated manufacturing overhead cost and the cash disbursements for manufacturing overhead for each quarter of the upcoming fiscal year and for the year as a whole.

Required 1:

Required 2&3:

Total Solution Ltd. is rendering its service on Network Solution to two types of customers: Company and Household. It categorised its operating department into: Company-Service and Household Service. Total Solution Ltd. also has two support departments: Administration (Admin) and Technician (Tech). Each of the operating departments conducts its operations independently. Total Solution Ltd. uses the number of technician’s hours used to allocate Tech costs and the number of admin staff used to allocate Admin costs. The following data are available for May 2020. Support Departments Operating Departments Admin Tech Company Household Budgeted costs $1,355,000 $3,200,000 $5,000,000 $4,000,000 Budgeted processing time (in min) 1,000 --- 1,600 2,400 Number of employees --- 15 9 36 Required (show your workings): Allocate the cost from support department to operating department and determine the total budgeted cost of each operating department after the cost has been allocated from the support department using the following method:

(a) Direct method

(b) Step-down method if the support department with highest dollar amount is allocated first. (c) Reciprocal method (using linear equation)

Nature’s Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The garden tool is expected to generate additional annual sales of 7,600 units at $30 each. The new manufacturing equipment will cost $90,500 and is expected to have a 10-year life and $6,900 residual value. Selling expenses related to the new product are expected to be 4% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.

MSM Company is planning an upgrade to its warehouse. The upgrade involves computerizing many of the material handling activities. The cost of the upgrade is expected to be $2,200,000. The equipment falls into the 5 year IRS depreciation range (use straight line full year every year) but is expected to provide annual cash cost savings and other annual cash benefits totaling $900,000 over each of the next 7 years. MSM is in the 30% tax bracket and has decided to use a 12% hurdle rate, as a first pass, to examine the financial viability of the proposed project. At the end of year seven the firm expects to need to pay $150,000 to have the used equipment disassembled and removed. This amount is fully tax deductible.

a. Prepare a well-organized schedule that concludes with the calculation of the expected NPV from this project.

b. Complete the following chart (one value on each line) making sure that the NPV is the final value presented.

The total after tax present value of the cost of the equipment is                           _________________

The total after tax present value of the depreciation tax savings is                      __________________

The total after tax present value of the Annual cash benefits is                                        ___________________

The total after tax present value of the removal costs is                                                     ___________________

                                    The project’s forecasted Net Present Value (NPV) is                     ___________________

Nature’s Way Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 5,700 units at $54 each. The new manufacturing equipment will cost $129,600 and is expected to have a 10-year life and $9,900 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a per-unit basis:

Direct labor   $9.20
Direct materials   30.00
Fixed factory overhead-depreciation   2.10
Variable factory overhead   4.60
    Total   $45.90
Determine the net cash flows for the first year of the project, Years 2–9, and for the last year of the project. Use the minus sign to indicate cash outflows. Do not round your intermediate calculations but, if required, round your final answer to the nearest dollar.

Out of Eden, Inc.
Net Cash Flows

Year 1   Years 2-9   Last Year
Initial investment   $
Operating cash flows:          
Annual revenues   $
307,800
$
$
Selling expenses  
Cost to manufacture  
Net operating cash flows   $
$
$
Total for Year 1   $
Total for Years 2-9       $
Residual value          
Total for last year           $

Greener Grass Fertilizer Company plans to sell 270,000 units of finished product in July and anticipates a growth rate in sales of 5 percent per month. The desired monthly ending inventory in units of finished product is 80 percent of the next month’s estimated sales. There are 216,000 finished units in inventory on June 30. Each unit of finished product requires 4 pounds of raw material at a cost of $1.35 per pound. There are 800,000 pounds of raw material in inventory on June 30.

Required:

1. Compute the company’s total required production in units of finished product for the entire three-month period ending September 30. (Round all intermediate calculations and your final answer to the nearest unit.)

2. Independent of your answer to requirement (1), assume the company plans to produce 760,000 units of finished product in the three-month period ending September 30, and to have raw-material inventory on hand at the end of the three-month period equal to 25 percent of the use in that period. Compute the total estimated cost of raw-material purchases for the entire three-month period ending September 30.